Handout: Math, Math. (And only then, Location)


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Betty Kincaid, PMN teaches you how to:
-Work with investors to increase
your business.
-Calculate a property’s rate of
-Explain to your clients why they
should own investment property.
-Demonstrate the value of a real
estate investment versus stocks or

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  • Handout: Math, Math. (And only then, Location)

    1. 1. Math, Math. (And only then, Location) Betty Kincaid, PMN
    2. 2. Why work with investors? <ul><li>Easier Sale </li></ul><ul><li>Repeat business </li></ul><ul><li>Referral business </li></ul><ul><li>Pre-qualified </li></ul><ul><li>Less emotional involvement </li></ul>
    3. 3. My action plan ____________________________________________________________________________________________________________________________________________________________________________________
    4. 4. My action plan ____________________________________________________________________________________________________________________________________________________________________________________
    5. 5. 1._______________________________________________________2._______________________________________________________3._______________________________________________________4._______________________________________________________5._______________________________________________________ 5 reasons to invest in real estate today
    6. 6. Rate of Return: How much can my money make in any given time frame?
    7. 7. Benefit #1: Tax Shelter <ul><li>Depreciation </li></ul><ul><li>-A non-cash deduction from taxable income based on the economic life of the improved real property. </li></ul><ul><li>Passive loss rules </li></ul><ul><ul><li>Since 1986, all real estate investments are considered passive . </li></ul></ul><ul><ul><li>Investors are limited to $3,000 of real estate losses. </li></ul></ul><ul><ul><li>You get around the passive loss rule if you meet the requirements of an active real estate investor or real estate professional </li></ul></ul>
    8. 8. Depreciation: A non-cash deduction from taxable income. Residential real estate improvements have an economic life of 27.5 years.
    9. 9. Benefit #1: Tax Shelter <ul><li>Long-term capital gain tax </li></ul><ul><ul><li>2011-2012 (0/15%) </li></ul></ul><ul><ul><li>2013 (10%/20%) </li></ul></ul><ul><ul><li>Recapture of depreciation (25%) </li></ul></ul><ul><li>Tax deferred exchange </li></ul><ul><ul><li>Defers capital gain and recapture of depreciation. </li></ul></ul><ul><ul><li>Replacement property must be of equal or greater value. </li></ul></ul><ul><ul><li>Strict time lines must be followed </li></ul></ul>
    10. 10. Benefit #2: Leveraged Growth <ul><li>Offer the ability to borrow large sums </li></ul><ul><ul><li>You can borrow 40-50% against stocks, 50-60% against bonds. </li></ul></ul><ul><li>At fixed interest rates </li></ul><ul><li>For long periods of time </li></ul><ul><li>Compound growth </li></ul><ul><ul><li>Use the power of leverage to accelerate your return </li></ul></ul><ul><ul><li>Earn return on borrowed $$ </li></ul></ul>
    11. 11. Benefit #3: Cash Flow <ul><li>Income </li></ul><ul><ul><li>Buy a property that cash flows from day 1. </li></ul></ul><ul><li>Appreciation </li></ul><ul><ul><li>Make your money going in. Buy under market. </li></ul></ul><ul><li>Gain in value due to owner expertise </li></ul><ul><ul><li>Improve the property then gradually raise the rental rates. </li></ul></ul><ul><li>Loan amortization </li></ul><ul><ul><li>The tenant pays the mortgage. As the mortgage decreases, the owner’s equity increases. </li></ul></ul>
    12. 12. Disadvantages <ul><li>Lack of liquidity </li></ul><ul><li>Loss of value due to market </li></ul><ul><li>Management requirements </li></ul><ul><li>Legislation </li></ul><ul><li>Unexpected expense </li></ul><ul><li>We learned all about the first 2 these last few </li></ul><ul><li>years. Values aren’t guaranteed but, if you buy at the best possible price, are conservative with leverage and keep your properties rented; then you’ll be okay. </li></ul><ul><li>The decision to self-manage your property or hire a professional usually comes down to time and expertise. You can learn what you need to know to be a great property manager but, you can’t buy more time. </li></ul><ul><li>Join a professional organization who monitor and lobby against unnecessary and potentially harmful regulations. </li></ul><ul><li>It’s always prudent to maintain a reserve account for unexpected expenses. </li></ul>
    13. 13. What could go wrong? <ul><li>Liability </li></ul><ul><li>You need a landlord policy and an extended liability policy of at least $1 million. You should hold each investment property in a separate LLC or use a series LLC </li></ul><ul><li>Vacancy </li></ul><ul><li>Even in the best market, you’ll need time to turn the property over between tenants. Cleaning, painting and minor repairs can take up to a month, so calculate that into your estimates. </li></ul><ul><li>Repairs </li></ul><ul><li>Unless you’re buying a new home, you’re going to have minor things to fix. Get a home warranty to handle the big things like air conditioners and plumbing issues. Inspect your properties annually. </li></ul><ul><li>Tenant Issues </li></ul><ul><li>You’re looking for good people who’ll pay their rent and won’t trash your house. When you qualify a tenant, look for a stable job and housing history. It’s worth forgoing a rent increase to keep a good tenant for another year (Remember, you lose up to a month every time a tenant turns over). </li></ul>
    14. 14. Commercial Property <ul><li>Office </li></ul><ul><li>Retail </li></ul><ul><li>Medical </li></ul><ul><li>Industrial </li></ul><ul><li>Vacant/Speculative </li></ul><ul><li>Warning: If the transaction is outside your expertise, ask for help </li></ul>
    15. 15. Specialty Property <ul><li>Vacation rentals </li></ul><ul><li>Timeshare </li></ul><ul><li>Tenant-in-common </li></ul><ul><li>Auctions, tax certificates, etc </li></ul><ul><li>Warning: If the transaction is outside your expertise, ask for help </li></ul>
    16. 16. Residential Property <ul><li>SFR </li></ul><ul><li>Condos </li></ul><ul><li>1-4 Family </li></ul><ul><li>You know how to do this </li></ul><ul><li>Find the properties that match the criteria </li></ul><ul><li>Also do a search for comparable rents </li></ul>
    17. 17. <ul><li>Buy and sell </li></ul><ul><li>Cash rules </li></ul><ul><li>Know your numbers </li></ul><ul><li>Be flexible </li></ul><ul><li>Plan for contingencies </li></ul><ul><li>Buy and hold </li></ul><ul><li>Long term </li></ul><ul><li>Maximum equity </li></ul><ul><li>Increase net worth </li></ul><ul><li>Appreciation & cash flow </li></ul>
    18. 18. When Analyzing Property <ul><li>What rents and sells best </li></ul><ul><li>Realistic appreciation rate </li></ul><ul><li>Realistic vacancy rate </li></ul><ul><li>Reasonable fair market rent </li></ul><ul><li>Reasonable operating expenses </li></ul><ul><li>Realistic projected sales costs </li></ul>
    19. 19. Talking to your client <ul><li>What’s their objective? </li></ul><ul><li>Cash flow </li></ul><ul><li>Appreciation </li></ul><ul><li>Tax Shelter </li></ul><ul><li>Business Use </li></ul><ul><li>What Return are they looking for? </li></ul><ul><li>What type of property do they want? </li></ul><ul><li>Single family </li></ul><ul><li>Multi-family </li></ul><ul><li>Retail </li></ul><ul><li>Office </li></ul><ul><li>Medical </li></ul><ul><li>Other </li></ul><ul><li>Self or Professionally Managed? </li></ul>
    20. 20. Capitalization rate <ul><li>Net Operating Income </li></ul><ul><li>______________ </li></ul><ul><li>Sales Price </li></ul>The rate of return the investor can expect to get from the property. Not dependent on financing .
    21. 21. Gross Rental Income - Operating Expenses ___________________ Net Operating Income Net Operating Income The annual amount of cash generated by the property.
    22. 22. Cash on Cash return <ul><li>Net Operating Income </li></ul><ul><li>− </li></ul><ul><li>Debt service payments </li></ul><ul><li>= </li></ul><ul><li>Income before Taxes </li></ul><ul><li>_________________ </li></ul><ul><li>Total Cash at Closing </li></ul>The rate of return the investor can expect on his cash investment Completely dependent on financing
    23. 23. Property #1 4128 Story Rock Las Vegas, NV 89115 MLS# 1189472 Let’s do the math
    24. 24.
    25. 25.
    26. 26. Compare Investments:
    27. 27. Compare Investments: <ul><li>2.2% 5-year CD: </li></ul><ul><li>After 5 years you earn $1,649.17 in interest and pay $461.76 in taxes, leaving $1,187.41 in net interest earned. </li></ul><ul><li>$1,187.41 divided by 5 years equals $237.48 in net interest earned per year. </li></ul><ul><li>$237.48 net interest per year divided by the total cash invested of $14,525 equals an annual return of 1.63%. </li></ul><ul><li>Property #1 (pages 23-25) </li></ul><ul><li>NOI $5,151 less $2,036 in annual interest payments equals $3,115 in taxable profit. </li></ul><ul><li>$3,115-$1,573.27* annual depreciation=$1,541.73 in taxable income. </li></ul><ul><li>$1,541.73 X .28 equals $431.76 in taxes. </li></ul><ul><li>$2,221 of cash flow after debt service less $431.76 paid in taxes equals $1,789.24 annual after tax income. </li></ul><ul><li>$1789.24 net income per year divided by total cash invested of $14,525 equals an annual return of 12.32% </li></ul><ul><li>Plus $894 in equity/debt reduction </li></ul><ul><li>*The depreciation figure is based on an improvement value of $43,265 (85% of the sales price) divided by 27.5 </li></ul>
    28. 28. Property #2 6027 Crumbling Ridge Henderson, NV 89011 MLS# 1147814 Property #3 391 Umbria Way Henderson, NV 89014 MLS# 1131668
    29. 29. Recommended Reading <ul><li>The Millionaire Real Estate Investor </li></ul><ul><ul><li>Gary Keller </li></ul></ul><ul><li>Rich Dad, Poor Dad </li></ul><ul><li>Cash Flow Quadrant </li></ul><ul><ul><li>Robert Kiyosaki </li></ul></ul><ul><li>Flip: How to Find, Fix and Sell Houses for Profit </li></ul><ul><ul><li>Rick Villani </li></ul></ul>